An agreement between Russia and Ukraine on restructuring $1.4 billion in natural gas debts has solved a problem that has troubled relations for years. But Russia may continue to pursue plans for bypass pipelines around Ukraine unless it is assured that its export route to Europe will be secure.

Boston, 9 October 2001 (RFE/RL) -- Russia has settled its dispute over gas debts with Ukraine, but it is not clear that it has dropped plans to build pipelines that could limit Kyiv's future access to fuel.

On 4 October, Prime Ministers Mikhail Kasyanov of Russia and Anatoliy Kinakh of Ukraine signed an agreement in Kyiv to restructure the debt of the national gas company Naftogaz Ukrainy.

Ukraine's $1.4 billion gas debt to Russia has been a major irritant in relations between the two countries. Russia has frequently accused Ukraine of diverting gas bound for Europe from the former Soviet pipelines that cross its territory.

The debt settlement is designed to bring an end to the arguments.

Kinakh said, "We have signed an agreement that will allow us to resolve the issue of our gas debts, taking into consideration national interests," according to the Reuters news agency. The agreement seems to meet several of Ukraine's key demands.

The accord gives Ukraine 12 years to pay $1.4 billion with a three-year grace period. The terms are similar to those that Kyiv recently negotiated with the Paris Club of official creditors. Russia had originally sought payments under more stringent terms.

Despite more than a year of pressure, Ukraine also refused to treat the arrears of its oil and gas company as a sovereign debt of the state. Instead, the obligation will be recognized as a corporate debt. Naftogaz Ukrainy will issue Eurobonds to raise funds for repayment, Kasyanov said.

The agreement was stalled last month after Russia demanded 10 percent annual interest. Ukraine proposed a rate of 0.5 percent over the London Interbank Offered Rate, known as LIBOR, which is used as a standard by British banks for dollar-denominated deposits.

The two sides settled on LIBOR plus 1 percent, much closer to the Ukrainian demand. The total interest is likely to be less than 4 percent per year.

Perhaps most important, Ukraine has not agreed to give up any share in its transit pipelines, which carry 90 percent of Russia's gas exports to Europe. Moscow has been maneuvering for years to regain control over the transit lines, which it lost after the Soviet breakup.

Russia has coupled its efforts with plans to build bypass lines around Ukraine. The Russian gas monopoly Gazprom has tried for over a year to convince Poland that it should allow a bypass line to be built through its territory to Slovakia.

The government has so far resisted out of concern that Ukraine could be isolated if Russia shifts its export route to the north. Gazprom has launched a feasibility study for the detour with major gas companies of France, Germany, and Italy.

So far, it is unclear whether the debt deal means that Russia will change its strategy for future gas exports to Europe. Much may depend on whether Russia believes that the risk of diversions has been reduced.

In an interview with RFE/RL, Julia Nanay, director of Petroleum Finance Company, a Washington-based consulting firm, said, "They have to maintain their reputation as reliable suppliers, given their ambition to become oil and gas partners to Europe."

There may be some preliminary signs that the bypass strategy will continue.

Last week during President Vladimir Putin's visit to Brussels, Russia and the European Union issued a joint statement outlining "projects of mutual interest and advantage," the RIA-Novosti news agency reported.

Among them was a "northern trans-European gas pipeline" and a gas pipeline from Russia's arctic Yamal Peninsula to Europe through Belarus and Poland. One line on the Yamal route through Poland has already been built. The bypass around Ukraine has been planned as the second line.

Last week, Gazprom also hailed the first deliveries of gas to the Netherlands through the Yamal-Europe line. The company said that Russian gas could reach Britain in two to three years, Reuters reported. The announcement could be aimed at building support for a route around Ukraine.

In addition, Russia's pipeline monopoly Transneft opened a new bypass line to carry oil to the Black Sea port of Novorossiisk last month. The line was built to avoid Ukrainian tariffs and losses due to diversion. But according to the Concise Energy news service, the high cost of the project makes it unlikely that Transneft will save money on deliveries.

The signs suggest that Russia will keep pursuing energy routes around Ukraine as an option, but the pace may depend on how well the new agreement holds.